The IRS has released a new Fact Sheet on Tax Preparer Fraud (FS-2005-8). The IRS notes that the taxpayer may ultimately be held criminally liable for fraud perpetrated by a return preparer:

Return Preparer Fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may also manipulate income figures to obtain fraudulent tax credits, such as the Earned Income Tax Credit. In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer must pay the additional taxes and interest and may be subject to penalties and criminal prosecution.

The IRS also notes that criminal tax convictions were up 75% in 2004 compared with 2003:

Criminal Investigation Statistical Information

FY 2002

FY 2003

FY 2004

Investigations Initiated

254

229

206

Prosecution Recommendations

89

169

167

Indictments/Information

61

109

121

Convictions

64

67

117

Incarceration Rate*

86.8%

83.7%

84.4%

Avg. Months to Serve

23

19

19

*Incarceration may include prison time, home confinement, electronic monitoring, or a combination.